The recent income statement of the Rockford plant is provided below: The Plant Income statement Sales Revenue $100,000,000 Expenses: Direct Material 40,000,000 Direct Labor $20,000,000 Indirect Labor $10,000,000 Advertising Expense- Direct $2,000,000 Administrative Expense $2,200,000 Salary of the plant manager and his staff $20,800,000 Corporate expense 3,600,000 Pension Expense 9,000,000 Equipment and vehicles maintenance expense $4,000,000 Rent Expense- Building A, (annual, fixed) $2,000,000 Rent Expense- Building B, per space (annual, for 30,000 square feet) $1,080,000 Depreciation expense (Equipment & Vehicles) $85,000 Total Expenses: ($114,765,000) Operating Income (Loss) ($14,765,000)

Assignment: Co. is debating on whether to keep the Rockford plant or close it down. Could you please help to decide?

3 Case Scenario: Co. produces computers and printers, and it has several plants worldwide, including the Rockford plant. It is specific to the Rockford plant that all of the printers in Co.s product range are produced in the plant for the company. The plant has not reported a profit for several years. Co.s strategy is diversification of the products to decrease the risk. The company also considers both the long-term and short-term impacts of the decisions. The plant manager of the plant is Mr. Jackson. Jackson and his staff also serve the company. If the plant is closed down, they will continue to serve the company, so their salaries/wages will not be affected by this decision. An investigation has revealed that administrative expenses are unavoidable. Advertising expense is a direct expense that is directly related to the advertisement of the printer product. Furthermore, the printers are only produced in the Rockford plant. If Gonzales Co. closes the plant down, then the company cannot produce and sell the printers to its customers. The Rockford plant is located in two different buildings. Production takes place in building A, and the finished products and raw materials are stored in building B. The rent contract of building A is a fixed committed cost ($2,000,000 annually), and it does not let the Rockford plant to sub- lease it. On the other hand, the rent contract of building B is based on the space occupied ($1,080,000 annually for 30,000 square feet), and it lets the Rockford plant to sub-lease it if the plant is closed down. Both rent contracts will expire in 2 years. The plant has two vehicles, and the total scrap value of those vehicles is $50,000. If the Rockford plant stops producing printers, then the company will sell those vehicles and the equipment of the Rockford plant in the building with their scrap values. The total scrap value of the equipment in building A is $500,000. Furthermore, Coca-Cola urgently seeks free storage near its factory for its overproduction. The Rockford plant is very close to the factory of Coca-Cola, so the production manager of Coca-Cola has contacted the CEO of Gonzales Co. to investigate the Rockford plants storage capacity in building B. Coca-Cola needs 10,000 square feet of space in building B and is ready to pay $600,000 annually. If the Rockford plant stops producing printers, then Gonzales Co. can sub-lease this 10,000 square feet space in building B to Coca-Cola for $600,000 annually for two years. The company has a contract with the supplier providing raw materials. If the orders are canceled due to a plant closing, then termination charges would amount to $20,800. Gonzales Co. has an excellent pension plan, so some laborers would probably choose early retirement. It is noted that half of the annual pension expense would continue whether the Rockford plant is closed down or not. Corporate expense is the common fixed expense, and it is allocated to plants of Gonzales Co. based on total budgeted salary costs. Covid-19 created new opportunities for some companies even though it caused a recession for others. The company noticed a tremendous increase in the demand for PlayStation game consoles during the COVID. Thus, the CEO wants his production and marketing managers to come together to consult him on whether Gonzales Co. should shut down the Rockford plant or not and whether the company should enter another business or not. Based on the primary analysis, it is noted that if the Rockford plant produces PlayStation game consoles instead of the printer, it requires an additional investment since the current equipment of the plant has nothing to do with the PlayStation console production.

QUESTIONS Step 1: Analyze the situation and define the stakeholders Question 1: a) Why does the company debate whether they keep the Rockford plant or not? Explain b) Identify the advantages and disadvantages of closing the plant down from the stakeholders perspective. c) In addition to cost, what are the additional factors you need to consider? Step 2: Identify relevant information Question 2: a) Identify and list the relevant and irrelevant costs. b) Identify and list the recurring and non-recurring benefits and costs. Hint: Relevant costs: Relevant costs are the cost that you can avoid/save if you make one decision over another. Yes, you save it forever if you drop the segment. Recurring costs/benefit: Recurring costs/benefits for items and services that re-occur at regular intervals. It may recur for a limited time, for instance, for one year, two years, etc. Non-recurring cost/benefit: Cost/benefit incurs once.

5 Step 3: Conduct financial (dis)advantage analysis Question 3: Prepare financial (dis)advantage of closing the plant down for the first two years- it would be closed down and the following years. (show all computations for financial (dis)advantage analysis to receive credit) Step 4: Propose and Evaluate possible solutions Question 4: Articulate the problem and propose the possible solutions by both considering the result of your financial (dis)advantage analysis and the additional factors. (explain it clearly and comprehensively and propose at least 3 possible solutions to receive credit). Step 5: Recommend the final decision to the company Question 5: What is your final decision on the plant? (Explain it clearly and comprehensively to receive credit).